Fiscal policy in current account surplus countries will spillover to deficit countries

The big trade and global structure trade for the next year has nothing to do with tariffs, but with changes in fiscal policy to address the savings imbalance problem. Tariff wars may push countries to change domestic policies to solve the savings problem but the line of causality is indirect.

The global savings imbalance still exists, and some analysts have been talking about this for well over a decade. This was formerly called by Ben Bernanke the "savings glut" problem. The North-South oil imbalance has been solved but the East-West imbalance still exists. The excess savings of Northern Europe and East Asia funds the current account deficit of North America. This will not be solved through raising tariffs. Tariffs will change the composition of trade across partners but will not eliminate the trade imbalance.

The savings imbalance (current account surplus) in Germany can be reduced by increased government spending through more aggressive fiscal policy. The China savings imbalance can be reduced by further switching from an investment led economy to a consumer driven economy. The savings imbalance can also be solved through tighter US fiscal policy, but this is an unlikely political solution. These fiscal and domestic changes are not immediately likely to occur, but if the signs start to exist, financial markets will react.

The impact of the changes in savings imbalances will spill-over to the US rates market. A reduction in global savings will place upward rate pressure in the US. This pressure could be contained through monetary policy which will impact the dollar. Nonetheless, these large structural changes will be the pressure points for where there will be the greatest opportunities.